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on International Finance |
| By: | Valentina Bruno; Ilhyock Shim; Hyun Song Shin |
| Abstract: | The financial channel of exchange rates operates through changes in risk-taking by investors and is reflected in the response of financial conditions to exchange rate movements. We show that stock returns also reflect the financial channel of exchange rates, with higher local currency stock returns associated with a weaker dollar. The broad dollar index emerges as a global factor, consistent with the financial channel operating through swings in risk-taking by global investors. We introduce the "dollar beta" as the sensitivity of stock returns to swings in the broad dollar index, and show that emerging market stock indices that have a higher dollar beta tend to have higher average returns, implying that the dollar beta is a cross-section risk factor that is priced. |
| Keywords: | global liquidity, pricing factor, emerging market, exchange rate. |
| JEL: | G12 G15 G23 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1000&r= |
| By: | Deniz Igan; Alexandre R. Lauwers; Damien Puy |
| Abstract: | Does foreign capital improve the quality of domestic institutions? Consistent with an institutional quality channel of capital flows, we show that industries that are more dependent on "good" institutions to operate grow more than others after foreign capital flows into the private sector. The effects are stronger in countries that are further away from the institutional frontier (e.g., emerging markets), but they disappear and even turn negative in countries with very low initial institutional quality, suggesting that foreign capital inflows can exacerbate the ex-ante institutional deficit. We also find that institution-dependent industries grow less when capital flows to the official sector. Our findings support the view that foreign investors can be, under certain conditions, a catalyst for institutional reform and that the relaxation of government budget constraints generally weakens structural reform incentives. |
| Keywords: | capital flows, institutions, manufacturing, institutional dependence. |
| JEL: | F33 F60 G15 E02 O43 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:994&r= |
| By: | Maik Schmeling; Andreas Schrimpf; Sigurd A. M. Steffensen |
| Abstract: | How are financial markets pricing the monetary policy outlook? We use survey expectations to decompose excess returns on money market instruments into term premia and expectation errors. We find excess returns to be driven primarily by expectation errors, whereas term premia are negligible. Our findings point to challenges faced by investors in learning about the Federal Reserve's response to large, but infrequent, negative shocks in real-time. Rather than reflecting risk compensation, excess returns stem from investors underestimating by how much the central bank has eased in response to such rare shocks. We document similar results in an international sample. |
| Keywords: | expectation formation, monetary policy, federal funds futures, overnight index swaps, uncertainty. |
| JEL: | E43 E44 G12 G15 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:996&r= |
| By: | Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto |
| Abstract: | We study how capital controls and domestic macroprudential policy tame credit supply booms, respectively targeting foreign and domestic bank debt. For identification, we exploit the simultaneous introduction of capital controls on foreign exchange (FX) debt inflows and an increase of reserve requirements on domestic bank deposits in Colombia during a strong credit boom, as well as credit registry and bank balance sheet data. Our results suggest that first, an increase in the local monetary policy rate, raising the interest rate spread with the United States, allows more FX-indebted banks to carry trade cheap FX funds with more expensive peso lending, especially toward riskier, opaque firms. Capital controls tax FX debt and break the carry trade. Second, the increase in reserve requirements on domestic deposits directly reduces credit supply, and more so for riskier, opaque firms, rather than enhances the transmission of monetary rates on credit supply. Importantly, different banks finance credit in the boom with either domestic or foreign (FX) financing. Hence, capital controls and domestic macroprudential policy complementarily mitigate the boom and the associated risk-taking through two distinct channels. |
| Keywords: | Capital controls; macroprudential and monetary policy; carry trade; credit supply; risk-taking |
| JEL: | E52 E58 F34 F38 G21 G28 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1816&r= |